Labor Demand on a Tight Leash

Mario Bossler and Martin Popp

Papers from arXiv.org

Abstract: We develop a labor demand model that encompasses pre-match hiring cost arising from tight labor markets. Through the lens of the model, we study the effect of labor market tightness on firms' labor demand by applying novel shift-share instruments to the universe of German firms. In line with theory, we find that a doubling in tightness reduces firms' employment by 5 percent. Taking into account the resulting search externalities, the wage elasticity of firms' labor demand reduces from -0.7 to -0.5 through reallocation effects. In light of our results, pre-match hiring cost amount to 40 percent of annual wage payments.

Date: 2022-03, Revised 2024-02
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Working Paper: Labor Demand on a Tight Leash (2023)
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